Foreclosure barrels down on Balsam Mountain Preserve

Foreclosure against Balsam Mountain Preserve could happen by month’s end barring a last-ditch financing deal by developers in the next couple of weeks.

A court order gave lenders the go-ahead to move forward with foreclosure at a hearing last week. The now imminent foreclosure was successfully put off by developers for three months while they attempted to raise capital to satisfy their lender. They say there is still a chance that they can do so, although the window is closing.

The property will be sold to the highest bidder at a public auction on the steps of the Jackson County Justice Center in late January or early February. Once there is a starting bid, prospective buyers have 10 days to file an upset bid. Each time there is an upset bid, the 10-day clock is reset.

Typically, the starting bid belongs to the lender, which is out to protect its outstanding debt on the property, a total that now tops $22 million, according to the lenders.

The sum continues to grow larger with each passing day. Lenders are tacking on costs for legal fees, property management and interest at a higher-than-normal default rate — making it increasingly difficult for developers to rally the capital they need to bail themselves out.

Balsam Mountain Preserve initially took out a loan of $19.8 million from the private equity investment firm Trilyn in 2005 to help develop and market the property. Balsam Mountain Preserve had paid down some of the loan, but since defaulting has racked up $4.5 million in interest, giving rise to the substantial payoff now required.

Jay Coward, a Sylva attorney representing Balsam developers in foreclosure, challenged the lender’s claim of more than $1 million in legal fees and administrative costs associated with foreclosure proceedings in the hearing last week. Coward said Trilyn will need to provide documentation detailing the alleged costs.

Who’s in charge?

Lenders wrested control of the property from Balsam Mountain Preserve and placed it in the hands of a third party in November. The outside company, called Radco, is charged with upkeep of the property, mainly security and maintenance.

Radco has tapped a profitable niche in the faltering real estate economy: reviving or at least stabilizing distressed property developments. Radco has repeatedly declined requests for an interview since assuming control of the property, but was featured in a November article in the New York Times profiling Norman Radow, Radco’s founder.

“Banks hire him to resurrect developments gone awry, particularly those half-empty condominium towers and gated communities that sprang up like weeds during the boom and are now in foreclosure,” according to the article.

The company is at the helm of $2 billion in real estate properties nationwide, Radow estimated in the article.

In some cases, the firm completely takes charge of the development in hopes of accomplishing what the ousted developer failed to do, namely making a profit.

The lender often puts Radco at the helm for the long haul, hoping to recoup their investment in the property. Radco makes tough decisions, like paring down luxury amenities initially promised to buyers by the developer or slashing prices to unload lots and raise cash rather than simply waiting for the market to turn around.

But property owners question how another company could do any better than the original developers, the well-capitalized firm Chaffin and Light with a strong national reputation for quality, high-end eco-developments.

“The only way out of this deal is you have to sell more dirt, and it isn’t going to happen until the economy recovers somewhat,” said Ron Hanlon, a homeowner in Balsam Mountain Preserve.

Property owners in Balsam Mountain Preserve don’t know how long Radco will remain in the shoes of the developer. For now, Radco has been mostly tasked with upkeep of the property, a move pushed by the lender to protect the property’s value while foreclosure proceeds. If maintenance was neglected, it could lead to decline in value, which would be bad for the lender. If no one bids on the property during foreclosure and the lender becomes the new owner, they may keep Radco on board.

Radco is currently involved in drafting an annual budget for the community association and the operation of the recreational amenities, including an Arnold Palmer designed golf course, dining room, swimming pool, horse stables and myriad other features.

Homeowners’ concerns

The fate of recreational amenities is the top concern of property owners in Balsam Mountain Preserve these days.

“If we are paying dues, we need to have the amenities,” said Dave Sparks, a homeowner in Balsam Mountain.

The initiation fee for the amenities was $75,000, which is mandatory when buying a lot in the development. There is also an annual fee for the upkeep of amenities, which could rise this year.

Theoretically, annual dues by property owners will pay for the upkeep and operation of recreational amenities, but a balanced budget usually isn’t possible without a critical mass of individual homeowners. But until then, the developer often chips in to subsidize them.

Chaffin and Light has been heavily subsidizing the amenities within the development in recent years. It is, after all, in the best interest of the developer to ensure the amenities are functioning at full tilt, a calculated selling point when courting new lot buyers. But new owners likely won’t subsidize the costs to the extent the current developers are, according to property owners involved with the issue.

The Arnold Palmer designed golf course in particular carries a hefty annual operating cost. Opening up the golf course at Balsam Mountain Preserve to outside memberships is one of the many options on the table.

Property owners hold one trump card to ensure the amenities are maintained and kept open. They could stop paying their dues. The developer — whoever that may be post-foreclosure — would be stuck footing the entire bill to keep the recreational amenities presentable in order to fuel future lot sales.

“We hope Trilyn and Radco realize it is important to keep us happy,” said Sal Guerriero, a homeowner in Balsam who sits on the community association board.

Two-thirds of the 354 lots in the development have been sold already. There are 120 lots still to go, and those lots are largely where the profit margin lies.

“That’s why the amenities need to be taken care of,” Guerriero said.

While an annual membership for the recreational amenities is voluntary, homeowners pay mandatory dues as part of the community association, which is responsible for road maintenance and security. That, too, has been heavily subsidized by the developers, but the financial burden will be shifted almost entirely to property owners this year, according to Guerriero.

In the long run, homeowners are confident the groundwork has been laid for a one-of-a-kind mountain community.

“We don’t anticipate there will be any significant change in the format of the community. The only question is who is going to own it,” said Hanlon, a homeowner. “Two years from now, we’ll look back on this and say it was an unfortunate dip in the road.”